2018 banking and securities M&A outlook

Navigating trends in bank mergers and acquisitions

Despite numerous deal catalysts in 2017, bank mergers and acquisition activity remained in neutral. Will 2018 be the year that banking M&A truly gets in gear? Will US tax reform, rising interest rates, and the potential easing of regulations boost the banking and securities M&A outlook for the year ahead? The 2018 report from Deloitte US examines banking M&A trends and expectations across banking, specialty finance, investment management and securities, and fintech.

Yet, there is reason to be optimistic about banking and securities M&A in 2018. Virtually all of the same drivers remain in place and are being bolstered by increasing regulatory clarity and US tax reform legislation—both of which will benefit bottom lines and add to capital war chests.

Drivers of bank M&A trends

2018 may be the year that banking M&A truly gets in gear. While there are several potentially favorable trends at work, positive developments are sometimes accompanied by challenges. The following banking M&A trends and drivers are worth watching for their potential catalyzing or inhibiting effect on industry deal-making activity during the coming year.

Regulatory and legislative reform. The passage of comprehensive tax reform, coupled with proposed, business-friendly legislation and regulatory policy changes may act as a flywheel to concurrently control and increase the banking M&A machine's momentum in 2018. There are four primary avenues through which changes may occur in FSI regulatory policy under the Trump administration: legislation, regulation, guidance, and personnel.

US tax reform. Will tax reform be a boom for banking M&A? The outlook is encouraging, with some caveats. Banks and other financial services organizations will have more available capital, but they also have numerous ways to use it: buy back stock, pay down debt, increase dividends, or engage in cash-based M&A. And beginning in January 2018, sellers' net profit losses (NOLs) became a lot less attractive as an M&A trigger because going forward they will be applied at the new, lower tax rate. On a positive note, tax reform may make US banks more attractive to foreign-owned institutions looking to offset slow in-country growth and enter US-specific markets.

Rising interest rates and higher valuations. Interest rates' influence on 2018 banking M&A could be mixed; rising rates may spawn competition in both lending and deposits, prompting an organization to rely more on organic growth and less on inorganic levers like acquisitions or alliances. Conversely, if an organization has loan origination or liquidity challenges, an acquisition could provide more stable access to deposits. Financial industry valuations are also marching upward, which may both grease and clog the gears of 2018 banking M&A.

Fall-out from geopolitical unrest. Government instability, political acrimony, and trade wars can affect the flow of money across global banks, the payments industry, and trade routes. Current conditions might impact 2018 banking M&A, especially purchases of US assets by European and Asian buyers or US private equity investors abroad. The United States' more business-friendly regulatory environment may make it more attractive for overseas participants, or would-be participants, to get into the US banking industry in 2018.

Fintech evolution. Banking and securities' view of fintech M&A is changing. Initially, deals were very focused on purchasing or partnering to build out capabilities in loan origination, front-end customer acquisition, payment processing, and mobile wallet. Today we are seeing significantly more activity on the back end as banks seek to take costs out of the system using, for example, cognitive technologies and robotics to automate administrative tasks.

Steps to put banking M&A in gear

With a number of deal catalysts in place for 2018—including US tax reform, rising interest rates, and the potential easing of regulations—there is ample fuel to accelerate M&A activity in 2018 , both in terms of deal number and size. Among the key steps banking and securities organizations can take to put M&A in gear:

Embrace evolving M&A processes. The M&A process has evolved since the financial crisis and now requires greater attention to detail. Savvy players are leveraging new technologies to expedite post-deal integration and maximize value realization.

Empower corporate development. Corporate development has evolved in recent years, turning into more of a venture capital-type function versus a traditional in-house investment banking function. Leveraging this team appropriately can lead to real competitive advantage.

Prepare and communicate. Both potential sellers and buyers should make playbook and deal processes current to maximize the efficient expenditure of time and resources. And regular communication with key constituencies throughout the deal process is a must.

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